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CriticalControl Solutions: A Deeply Undervalued C$0.30 Software Play Trading On The Toronto Venture Exchange

|Includes: Critical Control Energy Services Corp. (CCZFF)


- CriticalControl Solutions is the only company out there offering a pure cloud-based software solution for the oil & gas industry (think first-mover advantage here).

- This software company reported $50.9 million in revenue over 2014, is growing, generates cash, yet has a ridiculously low C$16 million valuation whereas the industry average is >$100 million.

- Their new growth strategy, which is progressing very well so far, should pave the way for multi-bagger share price appreciation.

- CriticalControl Solutions is a totally unknown stock; this research report is the first ever.

- Recent insider buying and high institutional backing confirm the buying opportunity.

Upfront note: the main listing and highest trading volume is on the Toronto Venture Exchange, ticker = CCZ.TO. Use this ticker also if you look for this stock on say Yahoo Finance. The US ticker is CCZFF, but this is a non-active listing, so focus on the more tradeable Canadian listing with an average daily volume of 25k.

I'm always on the look out for small cap stocks with limited downside risk (well financed, large discount to fair valuation, etc) and a clear multi-bagger upside opportunity (new product launches, land grab opportunity, etc). Add some good insider buying in the mix and sooner or later the stock will shoot up big. My trackrecord proves this, as my 2014 stock pick overview points out an average short-term double per pick. Some picks became impressive multi-baggers.

Today's article features CriticalControl Solutions, an unknown and extremely undervalued software company. This stock is totally off investors radar screens, as I could not find any coverage on the internet. That's good news, because that has yielded the next opportunity: a deeply undervalued C$0.30 stock worth C$1.00 at least. This article lays out the bull case.

About CriticalControl Solutions

CriticalControl Solutions is a software company offering cloud-based and scalable software applications for oil and gas producers. Software functionalities include production accounting, revenue accounting, gas cost allowance, financial accounting, chart and data auditing, lab, field, fabrication services, etc.

This is quite unique, there is no other company out there with a cloud-based software solutions penetrating the (rather conservative) oil & gas industry that provides all in just 1 package deal. Here's why oil & gas companies want this product: a one-time investment in a smart software solution significantly reduces costs longer-term. An interesting trend is that the oil crash has strongly motivated the industry to innovate and reduce costs, which should bode very well for CriticalControl Solutions.

Management has invested a lot in R&D over the past few years, and 2015 is the start of full commercialisation; the company has launched a plethora of new initiatives.

The investment community doesn't know this company even exists

My strategy is buying stocks that are undervalued and, perhaps more importantly, completely overlooked by the investment community. When I can't find any research or coverage on sites like Talkmarkets, Seeking Alpha, Stockhouse, Stocktwits, Benzinga, etc, I might be on to something. The best investment moments are before Wall Street finds out about it. CriticalControl Solutions definitely fits the bills.

Insider buying leading the way

Management has a lot of skin in the game, and board members are highly experienced in the oil & gas industry (backgrounds at Exxon, etc). Above overview shows the most recent transactions but they have been big buyers in the open market before.

Product overview

CriticalControl Solutions already commercialises a portfolio of products, with great delivery. Most of its revenue is recurring. The product list contains 10 services, here are some examples:

ProChart: ProChart uses color recognition to digitally interpret chart data for fluid volume calculations and offers the most extensive reporting capability in the industry.

NetFlow: Monitors and manages remote production and processing sites in real time with the industry's most effective SCADA dashboard solution.

ProTrend: ProTrend is the industry-leading solution that providers oil & gas producers with an accurate, low-cost, lab-independent composition analysis management solution.

For a full list of their products and services go here.

New strategy

The company has been quite active with releasing updates regarding its new strategy:

  1. Earlier this month, they announced they are pursuing a pure energy services focus by divesting their non-energy services (30% of total revenue) and trying to accumulate valuable assets from other companies. This project commenced in Q4 of 2014 and is expected to close in 2 months from now.
  2. Soon after the company made public that they successfully sold off a non-energy related business segment for $1 million.
  3. A few days later they announced the successful sale of another non-energy division for $1.7 million.
  4. A day later they purchased certain assets from Legacy Measurement Solutions for $2 million which should hasten their entry in the US market.

Overall, the strategy makeover is progressing very well, so I expect they will sell all their non-energy services before end of may as they stated.

Expansion plans

Here's a recent quote from management:

"Management's focus is the execution of catalyst plans over the next four quarters to penetrate the US oil and gas market with our core applications, which have been redesigned for the US market, and to penetrate the Canadian oil and gas market with our new software solutions," said Alykhan Mamdani, President and CEO of CriticalControl.

Let's see what these catalysts plans are:

Number 1: The company has invested in the development of a field data capture system to form an oil and gas producer's primary production data repository. The project commenced in 2012 and the company has launched its first version of the software in Q4 2014. Additional development is planned into 2015 to increase functionality.

Number 2: The company launched a product called ProMonitor Schematics in Q4 2013 and ProMonitor Risk in Q3 2014. The ProMonitor suite of products provides connectivity visualization and risk analysis capability in a geographic information system cloud based product. One of Canada's largest gas producers already is using this product. Investment in this new product is expected to continue along with investment in software development planned into 2015. Management has released a new version of the software in Q4 2014, which they anticipate will increase productivity and eliminate additional project expenses by mid-2015.

Number 3: The company has invested significantly in the development of a version of its ProTrend software for the US market in 2013 and 2014. The company has by now completed the initial phase of this project in Q4 2014. A recent press release revealed that this one is meant to be the flagship product for the US oil and gas market.

ProTrend has two components designed for two unique aspects of the US oil and gas market: ProTrend Lab, a cloud-based repository that allows a gas or liquids laboratory to disseminate laboratory results electronically at no cost to the client; and ProTrend Producer, which offers all features presently enjoyed by Canadian customers to US oil and gas exploration and production companies.

ProTrend Lab has been successfully implemented by CriticalControl's own laboratories in West Virginia and Pennsylvania thereby providing laboratory results electronically for more than 100 of CriticalControl's existing US clients.

This is a huge deal for the company, and the prospects are very big: ProTrend is already a market leader in Canada with increasing penetration into every size of client, from small producers to multinational, integrated oil and gas companies. In other words, this is a validated product (being market leader is the best validation a company can have), so there is no reason to assume the US market won't adopt this product.

Number 4: The company is investing in a new module of ProTrend for Canada and the United States to validate and edit oil and gas volumes reported from the field. The company has capitalized all the necessary expenses and expects to complete development of this product in the first half of this year.

In sum, the company has a portfolio of highly promising new initiatives rolling, making an obvious case for big upside.

Enormous market opportunity

How big is the US and Canadian oil & gas market? Estimates differ, but you can imagine that the addressable market totals in the billions of dollars. Here's the interesting thing: most of these companies work with outdated software. Think disruption, think innovation and think land grab opportunity here. I bet the oil crash motivated board members, or even forced, to revalue the cost structure and efficiencies within their organizations. This bodes very well for CriticalControl Solutions. Cloud-based software solutions are so popular because they increase efficiencies and reduce overall costs. This is exactly what the market needs and wants. In this case, the company even has a first-mover advantage. Here's a quote from a recent interview with the CEO:

"….there's a lot of software companies in oil and gas… but primarily they've all been the traditional model of you design software licenses, products that you need to buy, you need to install, you need to maintain and that has significant inefficiencies. We're basically the Office 365 answer to all of those things, where everything that we've done right when we started 10 years ago wasn't even called cloud based then but Software As A Service or Application Service Offering. It's now in the cloud, all of our software there's no upfront licensing fees, it's pay as you go, pay per well, pay per transaction and it's all 100% cloud based.

If the markets adopt their new initiatives, revenue could multiply. This is how scalable software platforms can pan out. Adoption by the market could lead to parabolic growth in revenue, and what is applied to the bottom line. Software stocks that hit the sweet spot are known to go as high as 10X. That's the appeal of investing in small and unknown software companies. In this case, it's gets even better, because CriticalControl Solutions is so undervalued. That amplifies the upside.

Why the oil crash is actually a good thing for this software company

When you read oil & gas industry, you probably thought, that's a tough business nowadays in which I don't like to be invested. I understand. A crash magnifies fear. It's no secret that oil & gas companies are struggling. But this is actually a good thing for CriticalControl Solutions, the 2 reasons being:

Number 1: Innovation really starts thriving when an industry is hitting rough waters. Why? Because companies must innovate, or else they probably won't survive. Tough market conditions force management teams to zoom in on the cost structure and efficiencies within their organisation. CriticalControl Solutions, as the only pure cloud play in this industry, offers in my view the best solutions.

Number 2: The share price of CriticalControl Solutions sold off too during the oil crash (chart provided later in this article), because every stock even remotely connected with this industry got beaten up. A crash induces panic selling. But think contrarian here. What risk is left if a crash just occurred? The biggest risk, besides negative company-specific news, is market risk. But that risk is gone. The oil price clearly hit a technical low, and after a 60% drop, I find it hard to see the price even going down more. When oil prices rebound, and that will happen sooner or later, this stock will shoot up big. Boone Pickens sees oil go up to $70 by year end. He's one of the world's biggest energy entrepreneurs, so I take his opinion serious.

CriticalControl Solutions is well financed

The annual 2014 statements revealed the next:

  1. Total revenue was $50.9 million which equates to a 11% annual growth, despite the oil & gas industry having a bad year.
  2. The company is cash flow positive despite increased spending on R&D (I regard this as an investment). I like companies focusing on R&D and still manage to generate cash.
  3. Working capital increased to a positive $5 million.

You can check out all financial statements over 2014 here.

As for the balance sheet, the company secured a $14 million banking facility back in November.

CEO Alykhan Mamdani commented:

"…In an uncertain economic environment, we have successfully put in place more access to capital with increased flexibility at a price significantly less than what we were paying. These new facilities strengthen our balance sheet and provide CriticalControl with greater flexibility in executing our strategic objectives..."

It's good news that the company decided not to dilute shareholders. The old $2.3 million long term debt got retired and replaced with new debt but this time with much more favorable terms. In short, CriticalControl Solutions has a solid balance sheet, and has, thanks to a good line-up of institutional backers, easy access to cheap capital if needed.

Given also that the balance sheet is strengthened with extra cash thanks to the divestitures, it's safe to conclude that the company's financials are healthy. The most important thing is that the company generates cash and has the financial capabilities to develop and market their products without an urgent need of diluting shareholders. What also helps is the clean share structure; CriticalControl Solutions only has a series of C$0.70 warrants outstanding, which is more than double the current share price, plus they expire this June.

CriticalControl Solutions can be very profitable anytime

Keep in mind that R&D related expenses stem from a strategic plan, without it the company would report much higher profits. The decision to dedicate significant resources to innovation right now, could and should lead to a much higher valuation and thus much higher share price in time. Also, management has always to option to flip on profitability. Once the necessary R&D expenses have been made, profits can rise in the millions. In other words, the company's ability to generate cash is currently being obscured by the R&D expenses.

Today's low C$0.30 share price provides a great buying opportunity

CriticalControl Solutions is an application software company so let's look what the average valuation in this industry is. This link by the world renowned professor in finance Damodaran tells us the average p/s multiple is 4.71, the average price/book is 4.62 and the average forward P/E is 74. His dataset is always up-to-date and based on the entire stock market, so it's a great comparison tool.

Now look at CriticalControl Solutions's multiples:

Price/sales 0.35 = 92% discount to industry average

Price/book 0.60 = 87% discount to industry average

Forward P/E 4 = 94% discount to industry average

You can see that CriticalControl Solutions trades at a mere 10% of what's normal in the industry, an extreme discount.

Sometimes a discount to some degree is warranted if the company loses money, but then the forward P/E would probably be negative. But that's not the case here; CriticalControl Solutions makes money and is growing its revenue. It's balance sheet contains no red flags either.

CriticalControl Solutions is a classic example of surreal mispricing by Wall Street. As I said, nobody knows about this stock, this company does not even have any PR. It's sitting on the complete left end of the promotion spectrum. By my analysis, there is no logical reason why CriticalControl Solutions should trade so ridiculously low, apart from Wall Street's ability to severely misprice small cap stocks.

You can also use your common sense here: this is a software company that already makes a profit, has an annual revenue of $50 million growing each quarter, has a portfolio of new and scalable initiatives about to hit the market, and is valued at just $16 million? Does this makes sense to you?

Why this stock should trade much higher instead of today's C$0.30

So if revenue is growing, and since this company has a scalable business model (typical for the software industry), it's not anything out of the ordinary to expect a price/sales of at least 1 right? That's still extremely conservative given the much higher industry average of 4.7. There are many cloud-based software stocks to be found that are valued at p/s multiples of 10 or even higher.

But let's be really conservative by saying that a p/s multiple of just 1 is fair in this case. Certainly if you consider that this company has a strong balance sheet, a clean share structure, is profitable and is targeting a very large addressable market (these factors actually warrant much higher multiples). With an annual revenue of $50 million, the market cap should then be $50 million. Other popular multiples used in valuing stocks, like price/book or EV/EBITDA, tell the same story.

So it's crystal clear that today's ultra-low $16 million market valuation is a huge disconnect with what's fair. A rock-bottom $50 million market cap equates to a C$1.00 share price. Now you can see why I'm a very happy buyer at C$0.30 (and so are the insiders).

What's more, if this stock would trade en par with industry average, the share price should be C$4.70!

Chart underlines the buying opportunity

I think the slide at the end of last year was caused by the oil rout. An irrational move as I explained earlier. Further, oil seems to have technically bottomed out, and so has this stock, as you can see that the C$0.30 range is clearly a technical bottom. This ultra-low price level provides an excellent entry point in my view.

Downside risk

First of all, the extreme undervaluation reduces downside risk by a large degree. There is still some risk though: the company needs to pay off its $2.3 million long-term debt eventually. I think they will. First of all, revenue continues to grow and they make a profit. Secondly, the debt is relatively small compared to the overall asset base. Thirdly, it's a low interest debt. Fourth, management can always tone back R&D spending to pay off debt if necessary; flexibility is key.

More importantly, the industry needs to adopt their new solutions. The company has dedicated significant resources - time and money - to develop and launch their innovations. If they fail to deliver, much of the upside will be cleared off the table.

Lastly, this is a thinly traded stock. The Toronto listing is quite illiquid while the OTC listing bears no trading at all. So watch the spread and limit your order if you plan to initiate one.


CriticalControl Solutions is the ideal investment opportunity for 3 reasons:

  1. Several valuation metrics and the fundamentals prove how ridiculously undervalued this stock is. Extreme undervaluation is a highly sought after double edged sword: it reduces downside risk by a large degree, and greatly amplifies the upside potential.
  2. The new strategy, the introduction of new products and services, and entry in the US market make a solid and probable case for a multi-bagger performance.
  3. This is a typical stock that does not appear on stock screeners. I'm a happy buyer before the investment community wakes up.

So I'm long, my price target is C$1.00.

Disclosure: The author is long CCZFF.